Surplus for requirements

Norway increases the size of its fiscal stimulus

The government is adopting a more expansionary fiscal policy stance to cope with the economic downturn and avoid a steep rise in unemployment. In its mid-term revision to the 2009 budget, the government announced an additional Nkr9.5bn (US$1.5bn) of oil revenue would be spent this year to boost activity. Although Norway's economy has appeared more resilient than most to the impact of the global recession, a marked deterioration in the public finances this year could trigger wider debate over the country's fiscal guidelines and its allocation of oil wealth.

This planned redistribution of oil wealth comes on top of the extra spending announced in the original draft budget unveiled last October and the supplementary measures that followed in January, which foresee an increase in both current and capital spending, as well as temporary tax relief for businesses. As a result of the budget revision, total nominal expenditure is projected to rise by 12.8% this year (real underlying growth in spending will be 6.8%), with Norway's structural non-oil budget deficit (the more important measure of the fiscal policy stance) forecast to widen by Nkr55bn to Nkr130bn, or over 7% of mainland GDP.

This is equivalent to Nkr39bn over and above the estimated return this year on the Government Pension Fund—Global (Norway's sovereign wealth fund, in which the nation's oil assets are held). However, the actual fiscal stimulus is not quite as impressive as the government is suggesting. The additional spending announced in January boosted the amount of fiscal stimulus in 2009 from 0.7% of mainland GDP (as described in the original budget proposal) to 2.4% of GDP. Including the latest measures, the size of the fiscal stimulus will increase to 3% of mainland GDP. However, approximately half of that rise comes from lower revenue, as dividends accruing to the state from its shareholdings fall. As this has not been counterbalanced by an equivalent reduction in spending, it gives the misleading impression of a significant fiscal easing, which the government has been keen to project.

Easing the rules

The centre-left coalition has nonetheless adopted a more expansionary fiscal stance than is normally allowed under the country's fiscal guidelines. These stipulate the gradual use of oil wealth, such that over time the structural non-oil central government budget deficit should correspond to the expected long-term real return on the Government Pension Fund—Global, estimated at 4%. This "Action Rule" determines how much of Norway's sovereign oil wealth is filtered back into the economy via the budget each year.

The government has taken advantage of the flexibility built into the fiscal guidelines to breach this limit (the framework permits spending above this level when growth is weak). In 2009 the Action Rule will now be exceeded by an estimated 1.7 percentage points (and quite possibly more). In view of the fact that te figure of 4% real return on the Pension Fund is also open to some debate, this raises the wider question of whether the Action Rule remains an appropriate or effective tool for fiscal policy management.

Leaking away?

The government's latest budget projections also show a considerable fall in the overall general government surplus, underlining the sensitivity of the public finances to fluctuating international oil prices. Because of the anticipated huge fall in the tax-take from hydrocarbon activities, a fall in non-oil taxes and higher public spending, the general government surplus is predicted to fall from Nkr479.3bn in 2008 to Nkr175bn in 2009. On the government's estimates, the surplus will more than halve as a share of GDP from 18.9% to 7.4%. That would still be a remarkably good outcome in comparison with the budgetary problems being faced in other European countries, although it is also dependent to some extent on the revised macroeconomic assumptions underlying the forecast.

The government expects mainland real GDP to contract by 1% in 2009—the first full-year decline in output since the early 1980s—which appears a little optimistic. The Economist Intelligence Unit is forecasting a 2% contraction, although this would still compare favourably with the expected outturn in much of the developed world. There are also some doubts over the government's projections for the unemployment rate—an average of 3.75% this year, rising to 4.75% in 2010 as mainland GDP posts a 0.75% increase. Given that we foresee a steeper up-tick in unemployment, there is a risk that the budget position could worsen by more than expected, which could have implications for future tax and spending policies, pensions sustainability and the credibility of Norway's fiscal framework.